The Costs of Workplace Favoritism: Evidence from Promotions in Chinese High Schools

Abstract: This paper studies the productivity consequences of favoritism in employee promotions within organizations. Using data from public high schools in four Chinese cities, I first show that teachers with hometown or college ties to the school principal are twice as likely to be promoted, after controlling for characteristics on their application profiles and their value-added in teaching. I then use the results from a survey in which I asked teachers to select anonymous peers to promote from a pool of applicants applying for promotion to infer each teacher’s revealed fairness views regarding promotion qualifications. Contrasting these with actual past promotions in turn allows me to measure if and when a teacher might have observed unfair promotions in her own school in the past. Exposure to unfair promotions adversely affects non-applicant teachers’ output, lowering their value-added and raising the probability that high-value-added teachers quit. The value-added effect appears to be driven primarily by teachers’ social preferences for peer workers and the consequent erosion of their morale when peers suffer unfair treatment, while the quitting effect comes mainly from non-favored prospective applicants’ career concerns as they learn about the principal’s bias and leave due to poor promotion prospects. These adverse spillover incentive effects lead to a substantial reduction in school-wide output, which is only slightly mitigated by increased productivity among favored teachers. Finally, a transparency reform that required principals to disclose to their peers the profiles of teachers that apply for promotion reduced the principals’ bias and improved the overall productivity of schools.